Will Tech IPOs Come Back Soon?

from the theories... dept

Venture capitalist Fred Wilson has laid out his reasons for why he believes the IPO market is about to come back. It's a worthwhile read if you're interested in the startup ecosystem. While I tend to agree with Fred on many different things, on this one I'm not at all convinced. I do agree that there are a growing number of companies who in the past would have gone public about now, but are held back by the near total lack of willingness to risk running the IPO gauntlet. The one thing that we agree on is that investors are going to start looking to put money into new investments sometime soon (there's way too much money being flooded into the market, and it needs to go somewhere). I'm just not convinced it will go into the traditional IPO market. I think it would be good if the IPO market opened up somewhat, but a flood wouldn't be good. It would create another bubble scenario. My guess (at this point) is that the money will go into something unexpected -- perhaps even new financial instruments. However, I'm curious: where do people think all the money that's being dumped into the economy will flow? What's the next bubble going to be?

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Has Our Economy Become Dependant On Bubbles?

from the that-wouldn't-be-good dept

I've said in the past that economic bubbles aren't necessarily a bad thing for the overall economy. Afterall, a bubble (at least one in a productive area, such as technology) tends to get a lot of money thrown at some problems, allowing a variety of innovation to take place very rapidly -- effectively throwing a lot of ideas at a wall to see what sticks. The fallout from a bubble popping often harms investors who bet on the wrong players in the bubble, but the fundamental benefit to society is often positive: a lot of infrastructure gets built very, very fast, and the strongest survives (and often buys up leftovers for pennies on the dollar).

However, there are others sides to the story as well. Joel West points to a recent interview of economists Martin Feldstein and Joe Stiglitz, where Stiglitz worries that we've built an economy based on bubbles:

Joseph Stiglitz: We had the tech bubble, followed by the housing bubble. But once we fix the recent mess, what will replace these bubbles as the engine for the economy?

Feldstein: What will replace the consumer spending bubble?

(Both men): We run the risk of the economy becoming depend on constant stimulus to replace these bubbles.

Stiglitz: I worry that after two years of stimulus, that the economy won't be going on its own, and then what will we do?

Along those same lines, economist Hal Varian has written, in the Wall Street Journal, a very straightforward and clear explanation of why the economy is stuck in neutral right now. Basically, (and, yes, I'm significantly paraphrasing), there's no new bubble to invest in, so (as Stiglitz implies above), everyone's looking for the government stimulus package to basically act as an artificial bubble until such time as a new bubble rises out of the mess. And, for that to happen in a productive way, any sort of "stimulus" needs to create incentives for others to invest in productive, growth-producing parts of the economy, rather than just throwing cash at pork barrel spending projects. This is a pretty fine line to walk (especially since it's politicians who are working out the details, and they love pork barrel spending).

And, to make matters even scarier, economist David Henderson points out that recent research from economists Christina and David Romer (it's worth noting that Christina Romer is Obama's choice to chair the Council of Economic Advisers) suggests that gov't fiscal policy in an attempt to modify business cycles doesn't work. In other words, things are going to be pretty messy in the economy for a while, unless we can come up with a productive and useful bubble quickly. Anyone have any suggestions?

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Incentives Align To Create Bubbles

from the blame-game-not-necessary dept

In the latest financial crisis, we've seen even more focus on casting blame than following most financial crises. It may be because of the sheer size of the mess this time, and it may be because the events that led up to this mess are a lot more difficult to understand than in the past -- and may even feel more nefarious. However, the deeper you look into the crisis, the harder it is to directly assign blame for the majority of the mess. Yes, there were scammers and fraud on the margins, but for the most part, everyone was doing things in a way that makes sense. This, among other things, is a key point brought out by Henry Blodget's article in The Atlantic about why these types of collapses happen so often. Basically, there is some amount of irrationality in the system, but over time, as more and more people seem to be making money against the irrationality, more and more explanations are made for why that irrationality is actually rational. And since the irrational activity goes on for so long, it becomes nearly impossible for most people to really believe that things are so irrational. So, it's not that there's anyone who did anything wrong that needs to be blamed, so much as we need to blame ourselves, for not taking enough time to recognize that what seems irrational in the beginning actually is irrational.

Of course, along those lines, it's important to realize that, as painful as market corrections like this are going to be, the end result is often beneficial. During the bubble period, lots of money gets thrown at certain things (infrastructure or products) that post-bubble are available for quite a discount. Bubbles help build up new institutions, and even if the original investments get washed away, something good often comes out of them in the end. It may not be clear yet how this financial crisis will eventually work out, but now is a decent time to be looking for opportunity in the carnage rather than worrying about who to blame.

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Comparing The Mortgage Bubble To The Patent Bubble

from the a-sign-of-things-to-come? dept

Bessen and Meurer have a brief, but interesting post noting at least some similarities between the "mortgage bubble" that resulted in the current financial crisis with the ongoing "patent bubble." In both cases, as they note, you're dealing with products where its not clear at all what the "rights" actually cover:

What happens when you give out lots of property rights, but nobody exactly knows what those rights cover? Yes, that might describe software/business-method patents and the result is costly litigation, disputes and a net disincentive for innovation.

But that also describes recent markets in collateralized debt obligations and credit default swaps. And with these markets, as anyone who has read a newspaper (some people still do that) during the last month knows, the result is a bit more ominous.

I'm not convinced the analogy holds, but it's something to think about in terms of recognizing how we've been seeing an ongoing patent bubble inflating pretty rapidly over the past few years. It's certainly nowhere near as big as the mortgage bubble, but it's still a pretty decent sized bubble, at this point.

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Does Alan Greenspan Deserve Credit For The Dot Com Bubble Too?

from the what-else-can-we-pin-on-him? dept

Over the last few months, there's been an increasing finger of blame pointed at Alan Greenspan, suggesting that his policies while running the Fed created the housing bubble which recently burst. However, others are going even further. A new book is suggesting not only is Greenspan responsible for the housing bubble, but he should take credit for the dot com bubble as well.

While the book suggests this in a negative manner, as we've pointed out for years, bubbles aren't necessarily a bad thing -- except for the people who got swept up in the hype and invested at the wrong time. Historically, bubbles tend to act as a great driver of innovation by getting a lot of innovative ideas thrown against the wall quickly to see what sticks. While bursting bubbles tend to be painful, the "good" things that come out of them tend to be quite important.

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Open Source Business Strategies Had A Bubble Too

from the now-its-growing-again dept

Matt Asay points us to a fascinating paper (pdf) by Oliver Alexy of Technische Universitat Munchen (TUM) Business School, that looks at how the stock market reacts to companies that announce open-source software releases. The paper looks at how stock prices move the day the news is released in an effort to gauge how Wall Street evaluates open-source-oriented business strategies. The study found a couple of interesting things. First Wall Street reacted positively to open-source announcements in 1999 and 2000, negatively in 2002-2004, and then positively again in the last couple of years. This suggests an open source bubble that coincided with the broader tech bubble. That was followed by a period of open source pessimism while the technology industry was in the doldrums. More recently, as open-source-related business strategies have matured, investor attitudes have become positive once again, and source code releases are rapidly becoming standard in some parts of the software industry.

Second, Alexy finds that Wall Street reacts more positively to business models that use open source as a way to directly cut costs or enhance revenue (for example by selling support services) than they do to longer-term strategies aimed at using open source as a "competitive weapon." Asay suggests the paper shows that a business will do poorly "if a vendor is more worried about pulverizing its competitors than it is in serving its customers," but that's not exactly what the paper is focused on. Rather, "competitive weapon" is used in the paper as a kind of catch-all term for source code releases focused on long-term strategic concerns rather than short-term revenue generation. For example, releasing a product as open source might help a company's preferred file format or networking protocol become the industry standard rather than a competitor's format. Alexy suggests that it's harder for companies to explain such long-range strategies to investors, and harder for investors to evaluate their effect on a company's bottom line. As Wall Street has become more familiar with the long-term benefits of open source software releases (for example, IBM's 2001 support of Eclipse) investor attitudes toward decisions to release software for long-term strategic reasons have become more positive.

Timothy Lee is an expert at the Insight Community. To get insight and analysis from Timothy Lee and other experts on challenges your company faces, click here.

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How I Learned To Stop Worrying About Bubbles And Build A Sustainable Company

from the it's-all-relative dept

It seems that everyone wants to be the person who calls the next bursting bubble, as we're suddenly seeing a... well... "bubble" in articles and blog posts worrying about whether or not we're in a new dot com bubble that's bound to burst at some point soon. The latest such discussion seems to be focused around a NY Times article on the frothiness of Silicon Valley these days, leading various commentators to agree or disagree with the idea that we're in a bubble and/or that the inevitable bursting of the bubble is about to happen. Instead of weighing in on one side or the other, I'd like to argue that it doesn't (and shouldn't) matter to most entrepreneurs. What happens may change your strategy, but it isn't necessarily a bad thing.

I have a presentation that I've done a few times at various events in Silicon Valley (and which I'll be doing again in a few months in Scotland) which is really focused on the history behind Techdirt and the changes we've made over time to our strategy, plan and business model. The point of the presentation is to make some suggestions in how to build a sustainable company that doesn't go out of business at the slightest hint of a downturn -- and I spend a fair amount of time talking about "bubbles" and why they shouldn't matter to most entrepreneurs. That's because everything has a relative price -- and when some things get more "expensive" (or scarce), other things tend to get "cheap" (or abundant). The trick is simply recognizing what's cheap at what point and what's expensive. Then focus on buying what's cheap and avoiding what's expensive. So, for example, after the dot com bubble burst, it was certainly true that money in terms of venture capital dollars became "expensive." That is, it was relatively harder to get. It was scarce -- and even if you could get it, it was often at great cost.

If you grew up in the dot com bubble, where success seemed to be judged on how much money you had raised, then of course this would seem to be awful. But, if you looked around, you realized that plenty of other stuff had become "cheap" or abundantly available. Technology, for example, was getting cheaper all the time. Remember all those stories about how cheap it was to startup a company these days? That isn't because of any magical change in the world. It was because companies who discovered that VC money was "expensive" were realizing they could be more creative and do other things. Another important thing that happened after the bubble burst is that good employees became "cheap." I don't mean that they could necessarily be employed for low wages (though that was true in some cases), but they were suddenly much more available. There were lots of fantastic people who were out of work or unhappy in dead end jobs. If you had a good idea, it was a lot easier to hire good people. Marketing was also quite cheap, because there was a lot less noise to compete with.

These days, things are a little different. Hiring good people is getting increasingly difficult. They're scarce -- and, thus, expensive. Marketing is a lot trickier, as you need to stand out from all that noise. But, the point is that everything is relative again. So, it shouldn't be any surprise at all to see that lots of money is flowing from VCs again. As things like people and marketing get more expensive, it only makes sense that the investment money gets "cheaper." It really just becomes a big pendulum. So, if you're working on a startup and are worried about the possibility of a bursting bubble, at least recognize that it only impacts one resource that you're looking for, and many of the others are likely to get cheaper as well, meaning that if the bubble bursts, you probably won't need as much VC money anyway. So, stop worrying about the bubble, and learn to buy into what's abundant and avoid what's scarce.

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